On January 1,Year 2,Pierce Corporation called the bonds payable at a price of $25,450.Which of the following shows the effect of this transaction on the elements of the financial statements?

Question

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Issue price = Face value of $25,000 × 102% = $25,500
Premium = Issue price of $25,500 ? Face value of $25,000 = $500
Annual amortization of premium = Premium of $500 premium ÷ 5 years = $100
Carrying value of the bonds payable on January 1, Year 2 = Bonds payable of $25,000 + Premium on bonds payable ($500 ? Year 1 amortization of $100) = $25,400
Gain (Loss) on early redemption = Call price of $25,450 ? Carrying value of $25,400 = ($50)
This transaction decreases assets (cash) by $25,450, decreases liabilities (bonds payable and premium on bonds payable) by $25,400, and decreases stockholders' equity (retained earnings) by $50. It increases expenses (loss on bond redemption) by $50, which decreases net income. The cash payment of $25,450 is reported as a cash outflow for financing activities on the statement of cash flows.

On January 1,Year 2,Pierce Corporation Called the Bonds Payable at a Price